Market Briefing: Capitulation
Markets have given up on trying to fight the Fed. Yields and the dollar remain well-supported after Friday’s date showed the central bank’s preferred inflation measure accelerating in January, suggesting policymakers will have to move more aggressively to cool aggregate demand in the months ahead.
The core personal consumption expenditures price index climbed 4.7 percent from a year earlier, up slightly from December as consumer spending jumped 1.8 percent month over month. This pushed market-implied terminal rate expectations above the 5.5 percent threshold, with back-to-back quarter-point hikes expected at the next three meetings.
If historical price dynamics are any indication, risk-sensitive assets could edge higher through today’s session - but implied volatility levels could remain elevated as market participants seek to hedge themselves against even-steeper rate increases.
The euro is flirting with the 1.05 mark against the dollar as traders assess growing downside risks and position ahead of a critical inflation print later this week. According to data released earlier this morning, M3 money supply growth decelerated to a 3.5-percent annualized pace in January, down from 4.1 percent in the prior month - meaning that private demand could weaken as lending conditions worsen.
Thursday’s February consumer price numbers are expected to show a fourth consecutive monthly decline in the headline inflation rate, paired with a modest increase in core prices. This should prove sufficient to keep the European Central Bank’s more hawkish elements on the warpath in the short term, but could also serve to anchor longer-term expectations, keeping yield differentials tilted against the common currency.
US durable goods orders probably tumbled by more than 3.6 percent in January, but December’s jump in Boeing aircraft orders likely skewed the headline print. With the transport category excluded, economists think purchase commitments climbed 0.1 percent. This might mark a deceleration from the pace set after the pandemic, but is respectable nonetheless - particularly in an environment characterized by goods deflation and more spending on services.
Pending home sales are expected to increase 0.9 percent in January from the previous month. Real estate market activity has proven surprisingly robust as strong balance sheets have helped households withstand higher borrowing costs, and as long-standing supply and demographic issues have created a persistent underlying demand imbalance.
Federal Open Market Committee member Philip Jefferson will discuss prices and the central bank’s dual mandate at 10:30. At a conference on Friday, he said The ongoing imbalance between the supply and demand for labor, combined with the large share of labor costs in the services sector, suggests that high inflation may come down only slowly”.
The Dallas Fed’s February manufacturing survey will land at 10:30, but markets are unlikely to react strongly - investors have long understood that the global factory sector is facing a slowdown, and (speaking frankly) survey data has largely proven useless in forecasting shifts in the real economy over the last year.
Tomorrow’s Canadian gross domestic product report is expected to show the economy flatlining in December, implying a 1.5 percent annualized expansion in the fourth quarter of 2022. Consumer spending probably remained strong, but business investment began to weaken toward the end of the year, and real estate-related activities hit a policy-induced wall.
Markets are unlikely to take this badly - employment, spending, and investment data suggest January’s print should show a drastic improvement (albeit one flattered by warmer-than-normal weather and easier financial conditions). We suspect winter is still on its way for the Canadian economy, and investors broadly agree - rate expectations for the Bank of Canada have badly lagged the Fed, suggesting that growth trajectories are seen diverging through the first quarter and beyond.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
CAD Current Account Balance, Q4
USD Durable Goods Orders, January, Preliminary
CAD Gross Domestic Product, December
USD Advance Goods Trade Balance, January
USD Conference Board Consumer Confidence, February
AUD Gross Domestic Product, Q4
USD ISM Manufacturing, February
USD Department of Energy Weekly Inventories
BRL Gross Domestic Product, Q4
USD Initial Jobless Claims, Weekly
USD Baker Hughes Weekly Rig Count